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Emerging markets may face a crisis this year for a host of reasons, with the isolated threat of sovereign debt default potentially dragging down the whole group.

On a dismal day in the U.S. market, with the Standard & Poor’s 500 off by 1.3%, one broad measure of emerging markets was only modestly lower: the Vanguard FTSE Emerging Market ETF (VWO) fell 0.5%. Lifting the market was a jump in Eastern Europe equities, especially in Russia. The Market Vectors Russia ETF (RSX) rose 5.3%. But in the red: the iShares MSCI Emerging Markets Latin America ETF (EEML) fell 1.4%, the Global X FTSE Greece 20 ETF (GREK) tumbled 4.2% and the iShares China Large-Cap ETF (FXI) was off by 1.9%.

“The largest risk to developed markets is contagion from an emerging market crisis which is in its very early stages,” says Deltec International Group, a group of financial services companies based in the Bahamas with roughly $2 billion in assets under management. “A crisis is unfolding in emerging markets. The negative view [was] predicated on declining U.S. dollar liquidity growth coupled with fragile fiscal conditions. Now, declining oil prices are accelerating and amplifying these concerns.”

In a global strategy outlook for the first quarter emailed to us today, Deltec CIO Atul Lele and his team are especially positive on India, and negative on Turkey, Venezuela and Russia, writing that “short opportunity exists in commodity economies.” Deltec thinks declining oil and other commodity prices “add a dangerous dynamic, exacerbating” declining currencies, weak domestic demand and slowing U.S.-dollar liquidity growth in some countries. Policy uncertainty has declined significantly in China and India, but in the latter, “the outlook is favorable given the new fiscal and monetary policymakers.”

Here’s Deltec’s cheat sheet of emerging market risk, and Venezuela shows up in every category, while Turkey and Russia are on four of the five:

Following blizzard-like snow, drivers abandoned roads in the borough of Queens, New York.

The Greek market is sinking as the newly-elected coalition names ministers. Shares on the Athens Exchange are down nearly 4% today, while shares of the National Bank of Greece (NBG) are down 15% and Piraeus Bank (BPIRY) is down 21%. The Global X FTSE Greece 20 ETF (GREK) is down nearly 7% in the first minutes of trading. The president of the once dominant Greek socialist party Pasok, Evangelos Venizelos, is expected to step aside; former Prime Minister George Papandreou formed his own party a few weeks ago after leaving Pasok, a party his father formed. As Greek politicians struggle to drag their nation into a new era, here’s a good summary of Greek political parties, from the UK’s Telegraphnewspaper.

Standard & Poor’s downgraded Russian bonds to junk status Monday afternoon, in case you were in an East Coast snow panic and missed the headline. This morning, just as the U.S. market opens, the Russian government is saying the Ukraine government must talk with rebels, and that Ukraine needs constitutional reforms. On Monday, the Market Vectors Russia ETF (RSX) fell 6.5%; it’s up 3.4% this morning.

Capital Economics notes that Russian bonds are shrugging off the S&P downgrade:

“The ruble has suffered a little following last night’s decision by S&P to downgrade Russia’s foreign currency sovereign debt rating to junk but the bond market seems to have largely shrugged off the move. This makes some sense – given the dramatic deterioration in the economic outlook over the past six months it was always a matter of when not if the ratings agencies took action.”

“A one-notch downgrade was largely expected and priced into Russian asset prices. … Tim Ash, a strategist at Standard Bank [said] “This reflects a combination of lower oil prices, sanctions and the conflict in Ukraine with the difficult geopolitical tussle with the West which shows no sign of easing. These factors have and are expected to continue to weigh on Russia’s balance sheet and overall credit matrix.”

The Market Vectors Russia ETF (RSX) is down 6.5% today. The ETF is up nearly 2% in January. Shares of banking giant Sberbank (SBRCY) have tumbled 12% today. The Direxion Daily Russia Bear 3x ETF (RUSS) is up nearly 21% today, while the Direxion Daily Russia Bull 3x ETF (RUSL) is down 19%.

The downgrade comes following days of escalating tension and death in Ukraine, and comments from President Barack Obama, in India, that indicate the U.S. is discussing a ramp-up in sanctions against Russia.

Indian Prime Minister Narendra Modi excorts the Obamas to India’s Republic Day Parade in New Delhi Monday.

As President Barack Obama visits India, Columbia University law and economics Professor Jagdish Bhagwati says the U.S. and India are on the verge of a solution on nuclear accident liability that is hampering trade.

Russia market reverses course: Shares on the Moscow Exchange tumbled nearly 5% today. The dive reflects rising tensions in Ukraine, where the government blamed Russian-rebel missiles for the death of more than 30 civilians in Mariupol over the weekend, while Russia blamed Ukrainian forces, the BBC reports. Russia stocks were among the better performers last week, but the Market Vectors Russia ETF (RSX) is down 3% this morning. It rose 5.4% last week. The ETF is up nearly 6% in January. Shares of banking giant Sberbank (SBRCY) have tumbled 10%, after rising 16.3% last week.

Reuters

U.S. President Barack Obama and first lady Michelle Obama as the U.S. anthem plays in India.

Anti-austerity radicals win Greek vote: The Global X FTSE Greece 20 ETF (GREK) has tumbled 5% this morning after the Greek radical-left Syriza Party swept parliamentary elections Sunday by a wider margin than expected. The questions now: Is a “Grexit” from the Eurozone inevitable? Will its centrist promises move back to “radical” in debt negotiations with the so-called troika (the International Monetary Fund, European Commission and European Central Bank)? More moderate factions of the party, headed by Alexis Tsipras, are reportedly fighting with those that want out of the Eurozone, Newsweek reports. The Wall Street Journal says the European Central Bank’s €1 trillion ($1.1 trillion) program of quantitative easing, unveiled last week, could insulate markets from a Greek exit.

India: President Barack Obama is in India, where he revealed breaktroughs in nuclear discussions with India, Reuters reports. The U.S. is positioned to gain contracts as Russia falls out of favor; the president used the India pulpit to wave the threat of intensified sanctions against Russia for further aggressions in Ukraine. General Electric (GE) and Lockheed Martin (LMT) are among the companies that could benefit from tweaks to nuclear agreements that would result in expanded business with India.

The Brazilian real weakened against the dollar Friday, sending Brazil’s benchmark Ibovespa index down 1.3% for the week. Water utility Sabesp, or Companhia de Saneamento Basico do Estado Sao Paolo (SBS) tumbled 13% Friday. GOL Linhas Aereas Inteligentes (GOL) was down 5%, and steelmaker Gerdau (GGB) was down 3.8%. Standard & Poor’s downgraded debt ratings on mining giant Vale (VALE) to BBB+ from A-, citing weakening iron ore fundamentals, and high expenses despite the 15% depreciation in the real and lower fuel and transportation costs over the past six months. The stock fell 9.6%.

A bright spot: Brazil telecom Oi (OIBR) rocketed 56% higher for the week; it will absorb debt worth 400 million euros tied to Portugal Telecom (PT) – a sign its merger could finally be on track.

Shares of beauty company Avon, which gets about one third of its revenue from emerging markets, rose 6.8% on the week, despite an 8% decline Friday as analysts threw cold water on takeover speculation. Avon (AVP) jumped 14% Thursday to $8.63 after a report surfaced that Avon is talking to a private equity suitor. B. Riley Analyst Linda Bolton Weiser, who has a Neutral rating on Avon and an $11 price target, notes that Avon’s board rebuffed Coty’s roughly $24.75 offer in 2012 — more than twice the $11-$14 share offer likely today. Roughly 20% of Avon’s 2013 sales were in sluggish Brazil, and it has Russia exposure too. See our recent post for the breakdown of emerging market exposure for large multinationals, including Avon: “What Russia, China, Brazil Growth Means for U.S. Consumer Brands” and our post, “Is Avon The Target Of A Buyout?”

Russia managed to dodge the headlines despite some escalation in Ukraine. Russia stocks were among the better performers, with the Market Vectors Russia ETF (RSX) up 5.4% for the week with banking giant Sberbank (SBRCY), up 16.3%.

Shares in India were mostly lower on the week, though they’ve moved up nicely this month. The iShares India 50 ETF (INDY) down 1.2% this week is up nearly 11% this month.

The ECB announcement “reinforces our EUR-bearish and USD-bullish views. We materially lower our full-year EUR/USD forecast, from 1.12 to 1.05. … Our Reaction in EM: Our EM strategists believe that QE will benefit EM fixed income via low European yields pushing investors to seek out higher returns. … With ECB action coming in above expectations, our EM strategy team maintains a positive stance on both EM local rates and EM credit. Their preferred market is CEE [central and eastern Europe], led by Hungary and Romania credit, which stand to benefit from the decline in oil and should offer attractive risk premium to Eurozone investors increasingly starved of spread at home. Outside of CEE, they like ‘low-beta’ Latin America (Mexico, Peru, Colombia) in credit, and India, South Africa, Brazil, Colombia in local rates.”

One way to play these themes: iShares JPMorgan USD Emerging Markets Bond Fund (EMB) and the iShares Emerging Markets High Yield Bond ETF (EMHY).

Among equities, there is Hungary’s refiner, MOL Magyar Olay (MGYOY), which is up 3% in U.S. trading, the SPDR S&P Emerging Europe ETF (GUR), which is flat, and the iShares MSCI Emerging Markets Eastern Europe ETF (ESR), up 0.8%. As a reference, the iShares MSCI Emerging Markets ETF (EEM) is down 0.5% today.

Sihuan, which trades over the counter in the U.S., is down more than 6% this morning. WuXi, which also trades over the counter, is down fractionally. Dr. Reddy’s shares are up 0.3%.

Here’s Morgan Stanley on the outlook for China’s pharmaceutical companies:

“Sector rotation in the last month of 2014 cast a shadow on China healthcare stocks, but we believe performance will get back on track in 2015, given healthy fundamentals and more appealing valuations. After the correction last December, the offshore China healthcare sector P/E dropped below its historical average. A turning point could come in March, when we expect most companies will report solid 2014 results and predict a healthy 2015 outlook. We expect faster industry growth in 2015 than in 2014, with more deals especially from large companies.”

On India’s pharma company outlook:

“The U.S. market outlook could dominate 2015 [with generic drug pricing at a crossroads.] We cite the sizable base for Indian companies, greater competitive intensity, flattish new opportunities (~$20 billion patent expirations), and pricing pressure (from customer consolidation). To balance, cost competitiveness, scale in operations and firepower in the pipeline remain – roughly 758 ANDAs [abbreviated new drug applications] are pending approval (1,211 ANDAs approved), and the industry is aiming at complex drugs, which should help sustain growth in 2015. gNexium and gCopaxone could be the prominent launches in 2015.”

Since the U.S. is a factor in the global market, here’s what Morgan Stanley highlighted, with our edits:

U.S. biotech: Pricing always a risk … M&A by large caps could become a more visible component of capital allocation in 2015.

Major pharma: foreign exchange poses a modest risk to 2015 financials as the U.S. dollar strengthens, but earnings should be in line with expectations. Success in major new therapeutic categories (CETPi for cholesterol, Alzheimer’s and cancer) would help boost premium valuation.

Specialty pharma: It rose 31% in 2014 vs major pharma’s 14% rise … the global pharma market remains highly fragmented, despite the torrid pace of M&A in recent years. … “deal activity will continue in this fragmented market and drive further outperformance in 2015.”

For investors seeking global healthcare exposure, the iShares Global Healthcare ETF (IXJ) and the SPDR S&P International Health Care Sector ETF (IRY) are dominated by the largest international pharma names.

Indian stocks rallied for a fifth day after the International Monetary Fund forecast that India’s economy growth will outpace that in China.

The S&P BSE Sensex Index is up more than 3% this week, and up 7.5% year to date. The iShares India 50 ETF (INDY) is up 0.3% in recent trading, while the WisdomTree India Earnings ETF (EPI) is up nearly 0.5% this morning.

That came on top of India’s surprise rate cut. The cut likely means India “will likely cut rates an additional 75 basis points or so over the next year as long as inflation remains under control, writes Jack Deino, head of emerging markets portfolio management at Invesco. The conditions that contributed to the rate cut: anti-inflationary catalysts including lower commodity prices, a stable rupee, a favorable winter wheat crop and the government’s commitment to fiscal consolidation. The risks to more cuts: an increasing current account deficit and/or rising food inflation. He concludes:

“We believe the RBI’s astute management of monetary policy under the leadership of Governor Raghuram Rajan — in coordination with the administration of Prime Minister Narendra Modi and Finance Minister Arun Jaitley, who now clearly has the burden of presenting a credible spending plan for fiscal 2016 — has laid the framework for macro stability needed to achieve growth. A credible reduction in interest rates, in conjunction with quashing recent volatility in both inflation and the US dollar/rupee exchange rate, will be key to engendering the kind of investment needed to meet the needs of India’s young and growing population … bringing down funding costs for Indian corporations and consumers will play a key role in India’s achievement of its long-term growth potential.”

And India’s S&P BSE Sensex rallied 1.85% after earlier hitting a record high.

On Monday, news broke that China’s GDP grew 7.3% during the three months through December compared to a year earlier and rose 7.4% for the entire 2014 calendar year. And the IMF lowered its forecast for China’s economic growth and joined the list of organizations to predict that India is about to outpace China and become the world’s fastest-growing large economy.

The European Central Bank is meeting this week and may unleash a program of quantitative easing. Such a move, if substantial, could help bolster emerging markets, or hit them hard, if the size of the program disappoints.

Things Tuesday were not rosy everywhere. The iShares MSCI Emerging Markets ETF (EEM) fell 0.13% in recent trading, though it has been inching higher since noontime.

About Emerging Markets Daily

Emerging markets have been synonymous with growth, but the outlook for individual nations is constantly changing. Countries from Brazil and Russia to Turkey face challenges including infrastructure bottlenecks, credit issues and political shifts. Barrons.com’s Emerging Markets Daily blog analyzes news, data and research out of emerging markets beyond Asia to help readers navigate the investment landscape.

Barron’s veteran Dimitra DeFotis has been blogging about emerging market investing since traveling to India and Turkey. Based in New York, she previously wrote for Barron’s about U.S. equity investing, including cover stories and roundtables on energy themes. Dimitra was among the first digital journalists at the Chicago Tribune and started her career as a police reporter at the Daily Herald in the Chicago suburbs. Dimitra holds degrees from the University of Illinois and Columbia University, where she was a Knight-Bagehot Fellow in the business and journalism schools. She studies multiple languages and photography.